Business rates: good news for commercial property developers

What is the rateable value of an unoccupied commercial building that is in the course of being redeveloped or substantially refurbished? That was the question considered by the Supreme Court in Newbigin (Valuation Officer) v S J & J Monk (a firm) [2017] UKSC 14; a question “of general public importance to the law of rating and valuation”. The Supreme Court was unanimous in answering the question in favour of the ratepayer.     

The issue

The ratepayer owned the freehold of premises previously occupied as a single office suite. The ratepayer employed a contractor to carry out extensive renovation and improvement works throughout the premises to turn them into 3 separate offices. These entailed the removal of most of the internal elements of the premises including plant, the lighting and power installations, the suspended ceiling, all the sanitary fittings and drainage connections and half the raised flooring.

The ratepayer wished to reduce its liability to business rates while the premises were being reconstructed, given that they could not be let to produce an income. The premises were described in the rating list as “offices and premises”. The ratepayer proposed that the description should be altered to “building undergoing reconstruction” on the basis that the building works meant that the premises could not be occupied. If successful, the alteration would reduce the rateable value of the premises from £102,000 to £1.

The crux of the matter before the Supreme Court was whether the premises should be rated on the basis of their actual physical condition on the relevant valuation day, or whether a valuation officer had to assume that they were offices in reasonable repair. This was because para. 2 (1)(b) of Schedule 6 to the Local Government Finance Act 1988 (as amended) provides that the rateable value of  non-domestic premises is to be assessed on the assumption that the premises are “in a state of reasonable repair…but excluding any repairs which a reasonable landlord would consider uneconomic”  (the state of repair assumption).

Setting the scene

The Upper Tribunal (Land Chamber) found that the premises had been stripped out to such an extent that to replace the missing elements would go beyond the meaning of repair. The state of repair assumption did not extend to the replacement of systems that had been completely removed. The alterations had rendered the premises incapable of beneficial occupation as offices and they should be rated as a “building undergoing reconstruction”.

In a surprising and highly-criticised decision the Court of Appeal disagreed, holding that the replacement of the stripped out elements would amount to economic repairs, therefore the state of repair assumption applied and the premises should be valued as offices in a state of reasonable repair.

A further appeal was made to the Supreme Court and such was the reaction to the stance taken by the Court of Appeal that both the Rating Surveyors’ Association and the British Property Federation intervened. There was a general concern that, unless the decision was reversed, many redevelopment schemes would no longer be viable.

The decision of the Supreme Court

In a clear and emphatic judgment, the Supreme Court stated that it had been an established principle of rating law that premises are to be valued as they in fact existed on the relevant valuation day. This was known as the “reality principle” and it continues to be a fundamental principle of rating.

The Court of Appeal went too far in finding that the state of repair assumption displaced the reality principle in the context of premises undergoing redevelopment. The logical first question in that context is whether the premises are capable of beneficial occupation. The repair assumption is irrelevant when answering that question.

A valuation officer must ascertain objectively whether premises are undergoing reconstruction and therefore incapable of beneficial occupation, rather than simply being in a state of disrepair. If the works are assessed as reconstruction, there is no basis for applying the state of repair assumption to override the reality principle.

In this case the premises were undergoing reconstruction on the relevant valuation day and the rating list should be altered to reflect that reality.

Conclusion

The Supreme Court decision comes as a great relief to commercial property developers and owners wishing to carry out extensive refurbishment works to upgrade their stock. Apparently, numerous rating appeals have been on hold pending the decision.

The Supreme Court dismissed the suggestion that their decision created a danger of ratepayers abusing the system, for example by removing sanitary facilities or windows and then claiming that the premises were incapable of beneficial occupation. The Court also pointed out that valuation practice before the Court of Appeal decision, as reflected in the non-statutory guidance in the Rating Manual produced by the Valuation Office, had been consistent with the approach advocated by the ratepayer.

The case is an important win for common sense as well as commercial property developers. It may also provide an indirect stimulus to the commercial property market, albeit against the general background of a business rates regime that is regarded widely as unsatisfactory.